>> volatility is part of the deal. >> two thirds of the way there. >> weaker links, the most vulnerable have gone down the most. >> markets worried about recession. 50% is priced in. >> what is priced in now is a mild recession.

>> this is "bloomberg surveillance." tom: good morning. claims that 8:30. we will do that. much more to talk about. we have to look at the markets. is this possibly a lift off the bottom? lisa: jay powell had a gloomy tone. there is a distinct possibility that we will see a bonds dip but so are bonds. bond yields are down. a sharp rally, what does this mean in terms of expectations? tom: we will be joined later by someone with great work on supply and demand. brent crude at that 1.10 level. lisa: his oil finally responding? tom: demand destruction.

lisa: how far can it go, given some of the tightness in the market? we have commodity analysts asking traders. is this it, is the oil market falling? they say no. that is why they are not seeing $150 a barrel. tom: focused on the westminster dog show, a lot happening. kailey leinz joins us. i teared up at that dog show. kaylee, i look at the trophy winners and that has to be the full crowd. there is a thundering silence of the groom crew. kailey: i don't know, there are still plenty of people out there. wilson talking about the snp -- s and p 500. the "r" word is still in

conversation. there is some gloom out there. they are deafly seeing it in haven. lisa was referring to how yields are coming in on treasury, take a look at europe. the tenure is down -- the 10 year is down. tom: 3.0 on that two-year. lisa scheduled an important conversation for bloomberg with the president of lithuania. this is a critical conversation or the states lisa:, especially given the threat of russia and what is going on with gas and germany talking about rationing gas in order to prepare for russia curtailing some of the supplies. an important conversation. tom: green on the screen.

futures are up. nasdaq gives me 6/10. 32 down to 29.17. brent is down. west texas is down. the two year yield, 0.1%. we will have to watch that. yields are coming in on the recession. we close out with dxy. euro cannot get out of its own way. they have a slight recovery in the last 20 minutes off that pmi data. sterling 122.11. we to have a brief brief on claims. lisa: i want to say one thing

about the bond rally. the idea that we are seeing a front and rally even as jay powell says we will hike into weakness to prevent inflation from getting worse. still, people are expecting that they will not have to go as far as he is saying. today, u.s. initial jobless claims. labor markets starting to soften more. services composite and pmi data. kailey mentioned this, we saw pma's -- pmi's falling in the face of some of these costs. it is important to watch if we get this same downside. day two of fed chair powell testifying to the house

financial services panel. how does he respond to the two-year yields coming down? the market expects less from him even as he goes harsher saying it is important to get back to 2%. the federal reserve will release stress test for banks. what will they look for? they are all down south of 20%. how much can it return capital after these tests? tom: very good. thank you. the two year yield of the united states through 3%, over that is deepak puri from dws on the state of play. on to talk a little bit of calculus. if that media looks inflation hot and then they look at where it will be less hot, you and i

know it is a marginal story. to be have a behavior or we are beginning -- do we have a behavior or are we beginning to discover that we will have marginally lower inflation, optimistic for the bulls? deepak: morning. i believe this is one of the things that the markets is panning out to be. if you look at the five-year thanks, i think tomorrow the final agreement will be on that aspect as well. h .3 versus 8.6 -- 8.3 versus 8.6. you will see some moderation in that number going forward. we are also seeing some demand

the guys are talking about. we are talking about a little bit of moderation and way above comfort level. it remains to be a key story in the market, especially with the high level of inflation and if it starts to accelerate even more. overall, i think market oscillates between inflation concerns the last couple of trading concerns. none of these teams will go away anytime soon. lisa: do you understand why they are rallying? deepak: i think the key narrative will be about recession and the markets will focus on the next level of fed policy action. it might be a little bit more market friendly. if we get to the terminal rate fairly quickly, you hedge back

into the neutral rate. we might get there quicker, but it might not be something sustainable for this market and we had back to the neutral number which creates this kind of narrative. lisa: it's still too early to say that we have seen the peak in yield? >> we are not really out of the inflation stored. recession concerns have taken over the narrative but inflation can raise its ugly head anytime. i would not be quick to judge that we are out of the woods when it comes to inflation. hence, the markets,, especially the bond markets, really going up in yields. i think the recession fears, to my mind, creates another set of opportunities and risk and something i have been seeing from the clients is a bit more

risk appetite. it's coming from very low levels indeed. there is nervousness but there is no panic in the market, at least to the investors i am talking to. just trying to get back into the markets. that's a relatively good sign. another trend is a homebuyers trend we are seeing where investors seem to be much more comfortable, you know, taking risk in u.s.-based equity and bond markets. tom: we have to leave it there. thank you so much. deepak puri with deutsche bank international. the domestic divide is tangible. i went through three pacific rim currencies today, thailand, philippines, and something else i cannot remember, and i will be honest, they are just breaking out. lisa: i am not laughing about the fact that they are weakening, i am laughing at the fact that it was notable that what other currency, whatever,

is really breaking up. surveillance cfa level on this thursday. it is interesting at a time when you see after years of trying to weaken currencies, it is now a bad thing. there was a businessweek story that, my attention because it follows onto the conversation we have been having, tom, every day on "surveillance" for the past couple of months. the currency wars narrative, it is a race to a stronger currency, so you don't import more inflation. that has to be the story of 2022. tom: the story of this hour, we are prepared for a conversation with the president of lithuania. we will see if we get there. the headlines, from the press office of mr. putin, this is mr. peskov speaking, peace possible but ukraine must accept all demands. kailey: ukraine is indicating that there are certain demands of russia that they are not willing to meet. these comments from the kremlin

come in light of the eu leaders meeting that is happening in brussels where they will talk about ukraine joining potentially the eu as a member. tom: by all reports, a brutal war in eastern ukraine. stay with us through the morning on economics, finance and investment. this is bloomberg. good morning. ♪ >> keeping you up to date with news from around the world. it was fed chairman jerome powell's most explicit acknowledgment yet that raising interest rates could lead to a recession. he told lawmakers that a recession as possible and a soft landing is very challenging. he said the other risk is that high inflation gets entrenched in the u.s. economy. powell is back on capitol hill today. west texas intermediate drop below $105 a barrel after closing at a six week low on wednesday. the u.s. benchmark has lost more than 15% since the close on june 8 as fears of a recession

increase. in china, president xi jinping reaffirmed a growth target the analysts say is out of reach. it was the first reference to target since a meeting in april. china is expected to miss its gdp goal of around 5.5%. the government's zero-tolerance approach to fighting covid and a weak housing market are the problems. in the u.k., a nationwide strike resumed today. talks broke down wednesday. the railroad union once higher pay and a guarantee of no compulsory job cuts. tuesday's walkout led to a roughly 80% cut back and rail service. the chief of the school district police in uvalde, texas has been put on leave in the wake of the mass shooting. top officials criticized him for delaying the confrontation with the gunman at the alamo tree school. state and federal officials are investigating the police response -- at the elementary school. state and federal officials are investigating the police

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♪ >> [indiscernible] if interest rates go to high too fast, it could drive us into a recession. >> certainly a possibility. it's not our intended outcome at all but it's certainly a possibility. the last few months around the world have made it more

difficult for us to achieve what we want, which is 2% inflation and still a strong labor market. tom: america, jerome powell answer a question from the gentleman from montana. knows what it's like to fill up the tank and drive next-door like 200 miles, which is what they do in much of his state of montana. there will be further testimony, i believe, today. lisa abramowicz, kailey leinz, jon ferro and myself. we got to get to jack fitzpatrick on the festivities in washington. but first, and i really want to frame this, maria tadeo with us with a bit of a history lesson on the importance of her discussion with the president of lithuania in the next hour. what this comes down to, maria, is if you take a7 west, you run into a thing called karen and greg -- kill leningrad. the russians own a hunk of land which is a port that does not

freeze over in the winter. that's the bottom line,, it is a port that in the winter they can get their naval ships into. maria: absolutely, tom. and of course, this also gives russia access to the baltic sea and ultimately, that's what it comes down to. you have to look at it on a map to really understand the importance of this place. it is very small but it is vital and it is crucial for the russians. it is squeezed between poland, which as we know has a very tense relationship with russia, very complex history with the russian federation, and lithuania. the issue here, of course, is that the russians are accusing the lithuanian government of blocking access to the port. they say if they don't stop doing that, we could see retaliation from the russians. for lithuania, this is now a real concern in terms of potential escalation that may come. tom: help our american listeners and viewers, including a dummy like me, what are the

distinctions between estonia, latvia and lithuania? are they one in the same? or are they like the swdes and nor regions they don't talk to each other? maria: i don't want to generalize. there is something they really share is their dislike for vladimir putin. of course, i am being very polite using that word. if you speak to them behind the scenes, they would use other type of linkage that i cannot use on tv. the thing that the three of them really share is this concern, this dislike, and of course, a very, very difficult history with russia. remember, they were part of the ussr. tom: did maria finesse that? that was just magical. lisa: she can even pronounce the last name. we are dealing with a potential cutting off of the gas supplies from russia into germany, which has led to calls of possibly

restricting certain types of energy usage. in the u.s., we heard about the possible removal of a gas tax, which was panned by both sides of the aisle. is there further discussion about trying to restrict demand, to take some stored stab at this -- some sort of stab at this on the other side? ? : there's not much discussion in terms of legislation -- jack: there's not much discussion in terms of legislation. there was pushback on the president trying to do a 90 day gas tax holiday. the alternative, as we have seen the pushback that was mentioned by chuck schumer and many other democrats, is something along the lines of a price gouging measure. but when it comes to restricting demand, really, the conversation is much more broadly about fiscal policy, reducing the deficit, that kind of thing. there's not a lot that they are talking about to specifically reduce demand for gas to target

gas prices. >> one thing i noticed in the hearings with chairman powell yesterday was that democrats were trying to point a finger, as they have, at president putin, at corporate greed. senator cortez master, the democrat from nevada, was talking about glencore raking in billions of profits on trading of commodities. is that a message that is landing with the american people? do they buy that? jack: it does not seem to be making a huge difference in the big picture, especially as we look toward the midterms. the president's polling is down. the democrats feel a lot of pressure to do something about gas prices and inflation more broadly. but that is clearly the line that the democrats have settled on, as opposed to a gas tax holiday, is at least trying to spin this as an issue of corporate greed. that's easier for them to campaign on. it has not lent itself to a realistic proposal that would necessarily make a difference in

the short-term, but if they are trying to make a show that they are doing something, that there is activity there, the price gouging, corporate greed line seems to be the mainstream democratic response, as they feel the desperation to come up with something. tom: jack fitzpatrick, thank you so much, from washington. maria tadeo, who is scheduled to be with us within the hour with the president of lithuania. i look at the screen and i think the trap is to ssay it's on it -- is to say it's an interesting this morning. i don't buy it. >> i find this morning fascinating because i don't understand the short and bond rally. . i understand why people are going into longer dated bonds. either the data comes in weaker than expected, the fed does not have to hike as much and we avoid the hard landing, right. that is not necessarily the very deep recession type of scenario that people are putting out there. or people are just thinking that they are not going to have to raise rates as much.

i don't understand why we are breaching 3% on a two year yield and people are expecting the fed to follow through on the hawkish expectations. tom: first signs of demand destruction, there is a chart floating around, the basic idea here of we are seeing fewer gallons of gasoline being pumped because of the behavior of consumers. kailey: does that affect the summer driving season? two people decide not to take those road trips anymore -- do people decide not to take those road trips anymore? tom: who takes a road trip? kailey: i love a road trip. lisa: some people can drive, tom. kailey: some people actually use their cars. nobody that i know has stopped taking a road trip. lisa: there you go. either way, the point of the story this morning is that the narrative for commodities, for oil in particular, has shifted from supply-side, supply been constrained, now to real concerns about the demand picture and whether that destruction that you see is going to kick in in a meaningful

way. tom: we are going to do this on oil later. we will be joined by an exquisite guest on the macroeconomic supply and demand of hydrocarbons. lisa: it's important to understand why we are seeing weakness right now and if it's just a pause or something akin to what we hear from citi. tom: if you're in helsinki, you look across the pond, to estonia, down to latvia, and a very much larger lithuania, and the conference of world war ii that give a hunk of land to russia. it is surrounded, and i mean surrounded, by poland and lithuania. maria tadeo with the president of lithuania in this hour. ♪

♪ tom: "bloomberg surveillance." good morning, everyone. we are waiting on a conversation with our maria tadeo, the president of lithuania. we will keep you abreast of that. that is a critical conversation, given the hydrocarbon turbulence that we see in the european union. thank you, javy blas, which i am

mispronouncing, lisa made a note of that earlier. on radio, it is simple. lisa, again, this comes back to esg out the window, germany is burning coal. lisa: they have these triggers now and if they get below certain reserves of natural gas, they will start using coal more because they definitely want to fuel their economy. if that comes down also to levels that are concerning, if reserves get below another certain level, then they start to have a state-controlled decision about where there will be cutbacks to energy usage, including recreational types of affairs. this is fascinating at a time when every politician wants to avoid these types of wear a sweater proclamations. tom: we will see that in america today with oil and the gallon of gas, i am going to call it. chief economist joining us this morning. the sensitivity of a gallon of gas, what does it do to your gdp

calculations? is it like tangential? or does it really play into the consumer part, the business part of gdp? >> the easiest way to derail the american consumer is sustained, heightened energy costs, which is exactly what we are seeing. when consumers look at near five dollars a gallon in terms of the price of gasoline, it's going to severely retard their ability to spend in other areas across the marketplace. that's going to have a significant impact on growth, as we are a consumer-based economy. 70% of that growth comes directly from the consumer's ability to spend, not just our nondiscretionary goods, but particularly, discretionary areas of activity. tom: we were having a post-show mimosa yesterday and we were all confused. it was a group effort. we were confused over chairman powell saying it is a strong economy, and yet, people like you are hysterical about recession. can you partition it and that

the domestic economy is pretty good, and all the angst is about the import/export dynamic? >> i don't think that you can argue that it's an isolate component of growth that is slowing. the fed chairman was correct, the labor market appears to be solid but we are already seeing signs of cracking, even in the labor market, as companies prepare for downturn and we are seeing layoffs pick up. that's not to say that the economy is going to fall off a cliff but we are seeing weakness in the consumer, a slowdown in manufacturing. the housing market is taking a hard hit. chair powell seems to be micro-focused on a few statistics in the labor market as justification for this relentless backup in the federal funds rate. tom: i cannot say enough how this harkens back to the conversations of 1994. it is forgotten in the mist of time, but it's a two parts american economy, domestic and foreign. i am sorry, the foreign numbers

are now all messed up. lisa: which is possibly the reason why you are hearing some concerns about dollar strength by companies, not because of necessarily the currency, but because of what it represents, which is weakness abroad and a lack of buying power in other non-us nations. when we take a look at the economic data rolling over just a touch, how much does this indicate the fed has an easier path, they will have to raise rates as much? how much is that the signal from the bond market right now that's got some support on all sides of the curve? >> unfortunately, the fed is not focused on domestic strength or domestic weakness. even if we see a further far ltering in the data, the fed has said we will continue to raise rates. if we look at the latest forecast from the atlanta fed's gdp model, they suspect that second-quarter gdp is going to come in flat. coupled with the negative print at the start of the year, we are talking about less than 0.1%

away from current recessionary conditions, yet the fed is still considering an additional 75 basis point increase stay few weeks from now. right now, the fed is solely focused on inflation. if we continue to see elevated prices coming down, particularly from the supply-side, the fed is going to tighten, now into recession, but potentially into a deep and dark recession. >> as we talk about the r word and this idea that jay powell put out there that this might be something that is unavoidable, how much are we looking at a much deeper recession versus a shallower one, especially if it's happening sooner? >> it's going to depend on whether or not we see price growth slowed with domestic growth. the fed will continue to raise the cost of capital, which will tamp down consumption and investment and result in that slower growth profile. if supply-side prices slow with the demand, the fed is likely to back off sooner than later. this is where we get a more

shallow recessionary scenario, a more run-of-the-mill recession, if you will. if growth slows and prices remain elevated, the federal continue to tighten, forcing us further into a deep and prolonged recessionary period, potentially leading to a stagflation period, which is more difficult for the fed to alleviate. > is essentially what you are saying that even if demand does moderate, if it does not moderate to the extent that offset still contains supply, the fed will not be able to achieve >> is essentially what you're saying that even if demand does moderate, to the extent that it offsets supply, the fed is not going to be able to achieve its goal of bringing inflation back down to somewhere in the ballpark of 2%? >> exactly and this is the conundrum the fed is facing.

we saw trillions of federal stimulus and that component can be addressed by raising the federal funds rate and increasing the cost of capital. it does nothing to address the supply side pressures we are seeing as a result of the aftermath of covid-19 or more recently because of international conflict. these are burials -- these are variables outside of the fed's control. kailey: he can't print ships and he can't pump more oil. we will see how he fares in day two of that today. we have asked this question a few times. what is your understanding of how quickly the fed intends to get there? >> the fed has somewhat abandoned the specific 2% range target in lieu of a meaningful decline. the fed doesn't need inflation

to retreat closer to 2.5% but they need to see a steep downward trend will established before they are willing to back off and we are not talking about .1% or .2% of improvement. they want to see a marked reduction in prices to feel the trajectory has been will established near that 2% target. tom: my question of the week. we asked the gentleman from deutsche bank, let me ask you as well. the media looks at inflation and says someday it will be less inflation. you know inflation is a the margin, expectations in the markets change. >> it doesn't represent what we saw in the latest cpi report. the core cpi improved.

market expectations for inflation text higher. tom: how critical is tomorrow's number? >> it's very important because that backup in inflation expectations was one of the primary drivers to take that action in june. the fed is aware that inflation had not yet peaked. so expectations within fed policy members for a higher cpi number was well-established but the market was caught off guard and with the backup in inflation expectations, that was enough to force the fed's hand. >> on july 27, what are the odds of a hard versus soft a recession? the idea of the deep one versus

a shallow one. >> when we look at where supply-side prices are and the limited improvement that we have seen, restoring balance to the global marketplace, establishing full resolution to international con. this seems to be a very complicated process at the very least. i do think the prolonged nature of these factors impact and cost leads us to a higher probability of a hard landing and deeper recessionary scenario. when we are trying to cap hard versus soft, i would say 60-40. tom: we are doing work here in the terminal. everyone has a terminal. kaylee has one that shows something besides crypto. we have a nasdaq draw up right now. that's not a drawdown.

lisa: what time period are you talking about? tom: it like a couple of 10 -- like a cup of coffee, cup of tang. lisa: it is still down 28.5% year to date. you draw the line up ahead of the open. this could change in a cup of coffee again. how much is this really just people trying to find a bottom if there is some sort of ruling over of the data in a recession. you get the haven bids, the cash flow. the yields come down and then you get the tech names. tom: lisa had to get therapy this week because she went to the grocery store and there was one less tomato in the can of tomatoes. did you know in tang there is like half an ounce less now? kailey: is there? did you write a letter? we have a lot to talk about.

tom: we have a drop in the market. 28 on vix is not bad at all. someone from europe called and said why are you quoting the dow ? because we are american. 2.99 handle in the two year yield. stay with us on foreign exchange. this is bloomberg. >> i'm ritika gupta. both republicans and democrats in congress are signaling there is little support for president biden's call to suspend the federal gasoline tax. it is seen as a symbolic move by a president running out of options to ease prices at the pump. he blames much of the increase on russia's invasion of ukraine.

germany has triggered the second stage of its emergency plan as russia cuts back supplies. that has european gas prices rising. berlin will tighten monitoring of the gas market and reactivate some coal-fired plants. there could be further capex in russian gas. rescue and relief teams are struggling to reach survivors and deadly earthquake that hit the remote southeastern region of afghanistan. the taliban has urged international aid agencies to help. u.s. prosecutors say british socialite ghislaine maxwell should spend 30 to 55 years in prison for engaging in a sex trafficking scheme with the late jeffrey epstein. prosecutors called her a sophisticated predator. bloomberg has learned that tesla is taking steps to ramp up output at its factory in shanghai. the elect vehicle maker will partly suspend manufacturing at

various points through early august. it will double the original target to one million cars a year. global news 24 hours a day on air and on bloomberg quicktake powered by more than 2700 journalists and analysts in over 120 countries. i am ritika gupta. this is bloomberg. ♪

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>> i think we are now back into a period in which it does matter. where it's the fundamentals of earnings, margins, inflation, interest rates and putting that all together in terms of appropriate valuation models will make a big difference for investors going forward. tom: thank you for the response to our conversation yesterday with abby joseph cohen.

she is a former advisor to goldman sachs and now at the columbia business school. i got a heated response from global wall street on her parsing of alpha and beta. look for that on bloomberg digital. kailey leinz in for jonathan ferro. lisa abramowicz and tom keene here. we are waiting for an important conversation with the president of lithuania with maria tadeo. we turn to the global head of g10 strategy at bank of america. let's start with first principles. what's wrong with a strong dollar? >> there's nothing wrong about it. it is consistent with the fundamentals. it is overvalued compared to the long time equilibrium, but the

fed is the most hawkish central bank out there. they are dealing with an over shifting economy while other economies are dealing with supply shocks. also at aversion is supporting the dollar, the terms -- risk aversion is supporting the dollar, the terms of trade. there are specific reasons why the dollar is strong. even though the fed is focused on inflation, a strong dollar is the result. tom: this came up twice yesterday. the bank of japan has a policy in place. they haven't blinked. i hearken back to 1992 and george soros and the bank of england. is there someone in the market overtly trying to do a soros redux or is that just fiction made for hollywood? >> not necessarily.

it is the only central bank sticking with conventional loose monetary policies. you can justify that because the core inflation is still way below 2%. the yen been weakening because of the terms of trade and the increase in energy prices this year. investors missed the dollar-yen trade and then they didn't want to buy at 195. it went to 130. 135, they don't buy it at this level. the paradox is we had a massive move in dollar yen and investors are not long. lisa: because they see the potential for further weakness which really drives the main question a lot of people have in the market right now. is everybody overly long with the dollar? is the strength we have seen simply a weakness and everything else that could get changed if there is a policy shift or is

this something about a global recession the dollar being the remaining hedge for risk assets? >> obviously the question of whether the dollar -- is out there, if use of the dollar remains strong for now, the main point is it will remain strong. for the dollar to weaken, you need the fed to be more concerned about growth than about inflation. and we heard from powell this week and this is not the case. you also need the ecb to be more hawkish and so far we are seeing a very cautious gradual approach from the ecb and still a lot of questions about how they will address fred and tatian risks. -- fragmentation risks. lisa: why have we not seen more cause of parity?

>> there are two reasons i think. europe avoided sanctions on gas which have pushed euro-dollar parity. this remains a risk looking forward. the second is although the ecb is the most dovish central bank out there with the exception of the bank of japan, they have expressed a strong will to address peripheral risk. markets don't want to show the euro before they hear the details of the new policy tools that the ecb has promised. at the same time, they don't want to put more money to work in europe. kailey: even if we get the details, or higher rates -- are higher rates enough -- 16 month low? >> exactly. that's a good point. the paradox is if the ecb comes

up with a good tool to address fragmentation risks, -- makes the situation for the periphery more difficult and at the same time because they are dealing with negative supply shocks, the growth outlook is much weaker than in the u.s. so while the fed is trying to address first round effects from an overheating economy, the ecb is trying to address second round effects from these shocks. the problem is the ecb has not even started addressing them yet so they have fallen behind and they have to move. most likely they start moving the euro could strengthen but they have to be more aggressive and it is unlikely for the euro to strengthen by too much because the u.s. economy continues doing much better. tom: thank you so much. with the bank of america and foreign-exchange in g10. i haven't talked to damian

sassower. he never talks to me. he just ignores me. lisa: that means every other day. tom: em is really intriguing right now. even at the peak it was up only like 7% per year and with the drawdown we have seen, it's up only 6% per year. that's not good enough. lisa: it's been lagging behind consistently which is one reason you don't have people flooding back in. -- is watching some of these developing markets and particularly the currencies as a potential stressor as the fed starts to hike and that i think is a concern especially in light of the strikes in the united kingdom bleeding out into a sentiment shift and potentially strained food supplies. tom: the train story really fluid.

kaylee is distracted. she's in deep planning for the crypto show. the bank of international settlements, he's talking about this con job of minors extractable value. can you explain to mere mortals like me why crypto has a different rulebook in affecting transactions for me buying the marginal share of apple computer? kailey: i don't think it's so much that it has a different rulebook as the rulebook is still being written for crypto. there are still a lot of regulations as to how these markets operate especially when you see liquidity issues arising over the last week or so that we have seen and minors are not having to sell their bitcoin holdings which they never wanted to do because of these liquidity issues. tom: 21,000 on bitcoin. some have had the kool-aid. others drink tang.

the president of lithuania. this is bloomberg. ♪

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>> volatility is part of the global deal at the moment. >> the most vulnerable have gone down the most. >> markets really worried ab